Why to invest in an expensive market that doesn't cashflow

*This post is being updated 10 months later with updated numbers in brackets to further show the value in the Vancouver, BC market

With an average single-family price of $954,000 ($990,400) in the Fraser Valley and $1,406,000 ($1,456,700) in Vancouver it's hard to understand and justify investing in this area we call the Lower Mainland. If you're not familiar with this beautiful place I get to call home then let me tell you some facts about the area.

I am located in Langley, BC which is 30 minutes or so from Vancouver, BC. The Lower Mainland sprawls from Chilliwack to West Vancouver and is broken into three regions: Fraser Valley, Greater Vancouver & Chilliwack. As of 2016, we have 2,759,385 (2019 - 2,928,101 and by 2024 forecasted to be 3,148,804) people living in the Lower Mainland and I'm sure that number is now closer to 3 million as over 60,000 moved here in 2019. We're forecasted to increase the population by 1.1 million come 2041. We are NOT a one-industry community and have one of the most diverse economies in the world, not just Vancouver but British Columbia as a whole. Vancouver has the port which is the largest in Canada and third largest in North America. Our film & tv industry is the 3rd largest in North America and provides more than 20,000 jobs (a 600,000 sqft film studio was just approved in Langley adding to that). We have a rapidly growing technology community due to our local universities having some of the best reputations and Vancouver offering a very high standard of living. Just to name a couple of small companies making waves into the area, Amazon is opening up a new 500,000 sqft of office space and Apple about 60,000 sqft of space in the new architectural masterpiece being built at 400 West Georgia along with Deloitte and the co-working company, Spaces. On top of all that, there is also the massive natural resources sector, tourism, construction and housing that make up the bulk of our economy.

Majority of those reading this most likely know Vancouver and that it is one of the most beautiful places in the world to call home due to the fact that you have all types of landscape at your doorstep including mountains, water, agricultural land, city views, etc plus a relatively warm climate all year round. With having such rare and sought out externalities it is no surprise that damn near everything is quite more expensive here than anywhere else wether its the tax you pay for groceries or buying a home. I already told you the high average home prices, nevermind the tax you have to pay on top of that. We have some of the highest land transfer taxes in the world with the breakdown as so.

1% on the first 200k
2% on the balance up to $2M
3% on the portion of value between $2M - $3M
5% on the portion greater than $3M
If you bought a house for $1 million you have to pay an additional $18,000 just in property transfer tax at closing.

I told you all of the above data about the Vancouver area to show you mainly that we have an incredibly strong economy which is desirable for large corporations and an environment desired by many backing up the price of homes we have. Vancouver is also a world city, and one of the most affordable when you look at prices in cities such as London, Hong Kong, New York and so on.
Price per sqft (CAD) for a condo in the city centre:
Vancouver, BC - $1,188
London, UK - $1,771
Hong Kong, HK - $3,975
New York, NY - $1,912

On top of a diverse and booming economy to jack up home prices, we are also extensively landlocked by natural features such as mountains, rivers, ocean and politically by the ALR (Agricultural Land Reserve) meaning there is only a finite supply of buildable land we have. All this goes to show a simple point that the price of homes and low cap rates here in the Lower Mainland is justified and will not be letting up too much anytime soon.

With all of this begs the question, how does an average person invest in property here and why would you? Cash flow is king and with an average single-family price of $954,000 ($990,400) an average townhome price of $521,000 ($555,000) and condo of $409,000 ($433,700) in the Fraser Valley you need to have an average downpayment of 35% just to cash flow which is not smart. With the market how it currently is, there are a good amount of deals out there that break-even or cash flow slightly with 20% and some opportunities for a slam dunk deal bringing in 40k/month but to go for those deals you need to have access to about $2 million minimum. So for the average person earning less than 150-200k/year what are you to do?

So we know that Vancouver has a strong economy and housing market but still, how and why do people invest here? It must only be mega-rich developers who can afford the million+ per-acre land prices we have and no average people are buying buy-&-hold properties, right? What if I told you there is some value in buying a property that breaks even or maybe even slightly puts you in the hole each month, would you believe me?

Before I explain I want to express my thoughts on this for myself. There is not a chance in hell I will be buying investment property in the Lower Mainland for many many many years to come and the reason is because I am young and should be taking bigger risks in search of a more favourable ROI to grow my wealth in places such as Kamloops, BC where a single-family home can be found for less than the average price of a condo here. As a person in my 20's I should be searching for the "riskier" (I put that in quotations because even though it may be riskier, do proper due diligence and it isn't so risky) investments because if I do lose then I have ample time to recover and grow. But for someone over 40, they don't want to take risks and buy property out of town. They want to have an investment property in there vicinity they can keep an eye on.

I find that some people are only looking at the ROI over and above break-even and not paying attention to the ROI if you did find a break-even buy-&-hold. The ROI on your money just by a tenant paying down your mortgage is 7.5 - 9% per annum. Read that one more time and let that sink in. How much is your retirement account earning you? How much is your stock portfolio earning you each year? It might be over that if you're lucky, however, the average return of the S&P 500 over the last 15 years was about 7% per year. That number is actually 2.5% after taking into consideration fees, taxes, inflation, actual returns, etc. I'm not going to get into that in this post but the point is real estate offers a much higher return thanks to the three return sources (principal pay down, appreciation, cash flow) and favourable tax benefits.

With a strong economy and an obvious goal for growth across the entire Lower Mainland our home prices are not going down significantly ever. Also, the fact that we're landlocked plays a huge roll in that. With that comes security, like I said we're not a one-industry town so you can buy your investment here and know that it will do well over the course of the next 5, 10, 15+ years while your tenant pays down your loan helping you to save for retirement. Living in a very expensive area and being asked all the time how do I invest here and why I wanted to write this post to shed some light on why and how everyday people can invest in the Vancouver market and have confidence there asset will perform well for many years to come as their tenant pays down there loan.